Three successive rounds of taxpayer bailouts and the recovery of the airline industry should be good news for American Airlines, as it is for other U.S. carriers. However American remains in a more precarious financial position than its competitors and has less maneuvering room than other airlines do facing the headwinds that are on the horizon for the industry.
American’s financial statements show liabilities that are greater than their assets. Liabilities on their second quarter balance sheet total $76.4 billion and assets of $68 billion. No other major airline is underwater in this way, and they face four major challenges that could make things worse:
- Interest rates are rising. American has the most debt of any airline. As the debt matures and they need to roll it over, interest expense will rise. They’re already making $2 billion per year in interest payments, and outstanding debt will be getting more expensive. They’re in a race against time to make money now in order to pay off debt before it becomes unsustainable. Whether they can keep making money depends on factors largely outside of their immediate control.
- Labor costs are rising. They’re in contract negotiations with their pilots and already publicly offered a 17% raise, and the union was unimpressed (though United’s pilot union pulled its endorsement of a recently-negotiated contract on the news).
- Fuel is an open question. Does we stay at $100 oil? Historically $100 oil has been challenging for airlines. The recent fare environment has supported it. Will it continue to?
- Recession is looming. That could hit demand hard. And demand will already fall in the fall – it always does, though usually the end of summer travel gets replaced by an upswing in business travel. That’s unlikely to happen in full force in 2022, with not everyone (especially in big cities) back in office and many companies not having fully restored their travel budgets this year. During the second quarter earnings call Vasu Raja reported corporate managed travel recovered to 70% – 75% of pre-pandemic levels.
Even after about $10 billion in direct taxpayer cash, and $5 billion in subsidized loans, American Airlines could wind up in chapter 11 reorganization. It remains the most vulnerable major airline. A recession combined with higher interest rates could both drive costs and sap revenue that the carrier needs to service its debt.
Regardless, American’s prospects for improving its balance sheet are limited, which suggests that it will continue to financially underperform the industry, since it will have higher debt servicing costs than competitors.
They are a high cost airline. They’re moving the needle on revenue generation with the loyalty program, selling status-qualifying miles to partners at a premium compared to how they’ve priced redeemable miles. To further generate revenue they can’t operate as an ultra low cost carrier with low fares. They need to offer a product that customers are willing to pay a premium for – generating higher margins. Even now, with the airline profitable, their margins haven’t recovered. That has to change. The question is how much time they have to make that happen.